Over-the-counter (OTC) financial derivative products are generally financial instruments or investment vehicles that include custom-tailored, negotiated contracts that are bought, sold, or otherwise exchanged between parties. That is, the OTC financial derivatives are typically not exchange traded. OTC derivatives may include options, forward contracts, foreign exchange (FX) spot and forward contracts, stocks, securities, bonds and any other financial product or investment vehicle that may be traded between parties.
It is desirable for the products to have a payoff that can be easily tracked or monitored using a computer model that may produce a theoretical value for closing and/or settlement purposes. Typically, the settlement or payoff for an OTC derivative may be determined according to conventional International Swap and Derivatives Association (ISDA) rules. The open position on a financial product may be periodically determined prior to expiry through a mark-to-market accounting process where the position is determined according to an agreed upon standard or benchmark. The standard or benchmark may fluctuate or vary with changes in the market. The final payoff may be determined for the derivative product as calculated according to the benchmark at expiration of the product.
The foreign exchange (FX) derivatives, such as options on foreign exchange instruments, may be settled according to an agreed upon benchmark. The benchmark may be a spot benchmark that indicates a spot exchange rate between two currencies for a given moment in time. Current benchmarks used for FX derivative products are determined through a survey of traded price information for spot FX rates that are made available from electronic trading systems. Other benchmark rates, such as the WM/Reuters Spot Rates and the 1FED FX exchange rate published daily by the Federal Reserve Bank of New York, include a buying rate between a variety of currency pairs. The benchmarks do not provide an optimally accurate and reliable benchmark for settling OTC derivatives, such as spot FX products. In addition, the benchmarks and the methods used to determine the benchmarks are not transparent to the public and the price inputs are typically weighted equally. Other currency fixing prices (e.g., The Chicago Mercantile Exchange's (CME) “Currency Fixing Prices”) may be determined through a volume weighted average for future contracts. However, such systems currency fixing prices do not provide a spot FX benchmark rate.
It would be desirable to provide apparatuses, processes and methods for settling OTC derivatives, such as FX derivative products, using synthetic spot benchmark rates.